By now, the news of crypto lender Genesis halting withdrawals has already made the rounds. The implications of this on other crypto platforms are becoming apparent as more time passes, but being so early, there remains a lot to be seen of how this plays out in the end. However, it is important to note that although Genesis was not a mainstream name like Celsius Network, its reach spreads wider than any other crypto lender in the space.
Unpacking The Genesis Impact On Crypto
In a Twitter thread, Blockworks founder Jason Yanowitz lays out how a Genesis collapse could be more impactful than the FTX decline. The crypto lender which powered a good number of Earn programs could trigger a catastrophic decline in the crypto market if it were unable to dig itself out of this hole.
Yanowitz first digs into the history of Genesis which was actually founded in 2013 when bitcoin was still in its infancy. It was billed as the first OTC Bitcoin desk before pivoting into the largest crypto lending desk. During this time, DCG, the parent company of Genesis, had grown its reach in the crypto market, with companies such as Luno, CoinDesk, Grayscale, etc.
Genesis itself was doing tens of billions in loans and trading volume at the height of the bull market in 2021, loaning funds to major crypto companies such as 3AC. When the latter collapsed, Genesis was left with a $2.4 billion hold and was bailed out by DCG.
3/ Then 3AC happened.
Genesis was the biggest creditor to 3AC having lent them a whopping $2.4 billion.
Genesis then filed a $1.2B claim against 3AC. DCG (parent co) stepped in and assumed the $1.2B claim, leaving Genesis with no outstanding liabilities tied to 3AC. pic.twitter.com/KwvMEpyQF8
— Yano 🟪 (@JasonYanowitz) November 16, 2022
Things had declined from here on out but Genesis’ reach still spread far and wide in the crypto market. Crypto exchanges such as Gemini used Genesis to power their Earn products. What this means is that instead of holding the deposited user funds, platforms like Gemini would take that crypto, lend it out to Genesis, who in turn lends it out to other firms, collects loan repayments with interest, sends back the funds Gemini had sent, and then Gemini pays out to the users with the promised yield.
7/ You give your crypto to Gemini → Gemini gives your crypto to Genesis → Genesis lends your crypto to a fund → the fund borrows from Genesis X+2% → Genesis gives Gemini X+1% → Gemini gives you X%
Voila! You now earn yield. pic.twitter.com/S4m4dxAVYP
— Yano
(@JasonYanowitz) November 16, 2022
Yanowitz notes that Gemini Earn is not the only one that does this but institutions, family offices and crypto whales utilize the same service. With Genesis halting withdrawals, it means it cannot or does not have the funds to pay out to these large investors. Where lenders like Celsius dealt directly with retail, Genesis deals with the ‘big fishes’.
Total market cap remains low at $779 billion | Source: Crypto Total Market Cap on TradingView.com
The Blockworks founder explains that because Genesis deals with such large clients and major players in the crypto space, a collapse would be very bad for the crypto market. “They sit at the direct center of crypto capital markets. They custody funds. They help institutions earn yield. They are the yield product for CeFi platforms. It’s not good,” Yanowitz added.
At the end of the thread, Yanowitz advises users to take funds off centralized finance platforms and consider using cold storage, a self-custody system such as Ledger. This is in line with the same advice that has been circulating in the crypto market for years; “Not your keys, not your coins.”
Featured image from CoinDesk, chart from TradingView.com
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